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Anyone know what (if any) haircut the pension-recipients would need to take if he actually runs the company into the ground? Does the Pension Benefit Guaranty C

Anyone know what (if any) haircut the pension-recipients would need to take if he actually runs the company into the ground? Does the Pension Benefit Guaranty Corporation (aka PBGC aka USA aks "us") have to pay pensioners 100 cents on the dollar? Does the defined benefits plan get turned into a defined-contribution plan as of current value? I feel bad for the employees of Sears...but i'm also selfishly worried that the US Government ("we") ends up having to pay out absurd pension schemes with absurd 7% annual return assumptions.

pkaye 8y ago
I think the maximum is around $5k/month. And best as I understand, the pensions funds as charged a fee to fund the guarantee. Meanwhile us on 401k investments has no such guarantees and republicans are trying to gut the social security system which we put sizable money into.
Retric 8y ago
7% annual return is high, but not really absurd when including dividends, if managed for the long term and accepting some risk.
- jakelarkin 8y ago
  its little-stated due to the massive fiscal and political implications but there's a belief among some of the better investment professionals out there that the past decade of 1) low baseline interest rates 2) large run up in stock multiples, 3) proliferation of index funds ... will depress long-run stock total returns into the 4-6% range for many decades.
- lotsofpulp 8y ago
  It is absurd, and that's why the IFRS and US government forced corporation pension funds to use discount rates that match high grade corporate bond yield curves (which are no where near 7%). See Pension Protection Act of 2006: https://www.treasury.gov/resource-center/economic-policy/corp-bond-yield/Documents/hqm_pres.pdf https://www.treasury.gov/resource-center/economic-policy/cor...
  - Retric 8y ago
    I am not saying it's accurate or reasonable. But 130% would be absurd in that it can't happen, but 7% is within the realm of possibility. So, unacceptably optimistic or unlikely etc sure but the bar for absurd is higher than just unusual.
    - lotsofpulp 8y ago
      I’ve seen pension funds with an discount rate sensitive causinf a 1% change in discount rate can have a ~20% effect on liability. Being off even a few hundred basis points results in huge numbers. There’s a reason you don’t see annuities equal to taxpayer funded defined pensions even offered for sale.
  - stale2002 8y ago
    I mean, the comparison should be against the stock market, not high grade corporate bonds. Stick the money in the s&p 500 and it will easily get 7%. (The real number over the last 100 years is 9.7%). Having the number br 2.7% lower then that is a fair compromise to take into account risk.
    - lotsofpulp 8y ago
      What is your source for 9.7%? I suspect it’s subject to survivorship bias. There’s plenty of research on choosing discount rates for defined benefit pensions and annuities, and many papers to read. And there are myriad reasons you can’t just stick the money for a pension in the s&p 500, but suffice to say, everhone in finance sticks to the IFRS numbers and knows US GAAP is garbage.
      - stale2002 8y ago
        My source is the S&P 500, which has been around for a hundred years. You can pick the DOW if you like, as it has similar returns over the last hundred years. Although, FYI, the 9.7% number I was using was not inflation adjusted. Perhaps that 7% number was inflation adjusted? That would make sense as the s&p inflation adjusted number comes out to be 7% almost exactly. This is not survivorship bias, as the way investing in the s&p 500 works is that it is a moving list of the top 500 companies market cap. IE, if a company goes down in price, and drops out of the top 500 companies, then so would your investment in it. And total returns take this into account. It is perfectly possible to simply invest in the market, and recieve market returns, if you are also willing to accept market risks. The stuff you are talking about, regarding risks, only matters to people who care about short term returns, not people who care about long term returns. And a pension fund, which has a time horizon of decades, seems like the very best example of a fund that would not care the slightly about short term risk, and can instead optimize for long term returns.
duxup 8y ago
Has the US Fed Gov bailed out a pension recently? IIRC There was one in a red state that was left from some private company that the Feds promised to bail out but even when Obama proposed it get bailed out other GOP members refused. I don't know if they can get very far with Sears if politicians are out there won't even help constituents... let alone Sears. Sorry I forget the name of the company associated with that pension. Granted the Gov will pay.... just via social services and such.
rtkwe 8y ago
There's a cap on the amount that PBGC will pay per person per year: https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation#Maximum_guaranteed_benefit https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...
jlos 8y ago
Don't know about the U.S. but in Canada the Sears pensioners got a 30% reduction.[0] [0]https://www.cbc.ca/news/business/sears-canada-pension-retirees-1.4773283 https://www.cbc.ca/news/business/sears-canada-pension-retire...

pkaye 8y ago

I think the maximum is around $5k/month. And best as I understand, the pensions funds as charged a fee to fund the guarantee. Meanwhile us on 401k investments has no such guarantees and republicans are trying to gut the social security system which we put sizable money into.

Retric 8y ago

7% annual return is high, but not really absurd when including dividends, if managed for the long term and accepting some risk.

jakelarkin 8y ago
its little-stated due to the massive fiscal and political implications but there's a belief among some of the better investment professionals out there that the past decade of 1) low baseline interest rates 2) large run up in stock multiples, 3) proliferation of index funds ... will depress long-run stock total returns into the 4-6% range for many decades.
lotsofpulp 8y ago
It is absurd, and that's why the IFRS and US government forced corporation pension funds to use discount rates that match high grade corporate bond yield curves (which are no where near 7%). See Pension Protection Act of 2006: https://www.treasury.gov/resource-center/economic-policy/corp-bond-yield/Documents/hqm_pres.pdf https://www.treasury.gov/resource-center/economic-policy/cor...
- Retric 8y ago
  I am not saying it's accurate or reasonable. But 130% would be absurd in that it can't happen, but 7% is within the realm of possibility. So, unacceptably optimistic or unlikely etc sure but the bar for absurd is higher than just unusual.
  - lotsofpulp 8y ago
    I’ve seen pension funds with an discount rate sensitive causinf a 1% change in discount rate can have a ~20% effect on liability. Being off even a few hundred basis points results in huge numbers. There’s a reason you don’t see annuities equal to taxpayer funded defined pensions even offered for sale.
- stale2002 8y ago
  I mean, the comparison should be against the stock market, not high grade corporate bonds. Stick the money in the s&p 500 and it will easily get 7%. (The real number over the last 100 years is 9.7%). Having the number br 2.7% lower then that is a fair compromise to take into account risk.
  - lotsofpulp 8y ago
    What is your source for 9.7%? I suspect it’s subject to survivorship bias. There’s plenty of research on choosing discount rates for defined benefit pensions and annuities, and many papers to read. And there are myriad reasons you can’t just stick the money for a pension in the s&p 500, but suffice to say, everhone in finance sticks to the IFRS numbers and knows US GAAP is garbage.
    - stale2002 8y ago
      My source is the S&P 500, which has been around for a hundred years. You can pick the DOW if you like, as it has similar returns over the last hundred years. Although, FYI, the 9.7% number I was using was not inflation adjusted. Perhaps that 7% number was inflation adjusted? That would make sense as the s&p inflation adjusted number comes out to be 7% almost exactly. This is not survivorship bias, as the way investing in the s&p 500 works is that it is a moving list of the top 500 companies market cap. IE, if a company goes down in price, and drops out of the top 500 companies, then so would your investment in it. And total returns take this into account. It is perfectly possible to simply invest in the market, and recieve market returns, if you are also willing to accept market risks. The stuff you are talking about, regarding risks, only matters to people who care about short term returns, not people who care about long term returns. And a pension fund, which has a time horizon of decades, seems like the very best example of a fund that would not care the slightly about short term risk, and can instead optimize for long term returns.

duxup 8y ago

Has the US Fed Gov bailed out a pension recently? IIRC There was one in a red state that was left from some private company that the Feds promised to bail out but even when Obama proposed it get bailed out other GOP members refused. I don't know if they can get very far with Sears if politicians are out there won't even help constituents... let alone Sears. Sorry I forget the name of the company associated with that pension. Granted the Gov will pay.... just via social services and such.

rtkwe 8y ago

There's a cap on the amount that PBGC will pay per person per year: https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation#Maximum_guaranteed_benefit https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpo...

jlos 8y ago

Don't know about the U.S. but in Canada the Sears pensioners got a 30% reduction.[0] [0]https://www.cbc.ca/news/business/sears-canada-pension-retirees-1.4773283 https://www.cbc.ca/news/business/sears-canada-pension-retire...